Here are four essential ratios for analysing companies

Here are four essential ratios for analysing companies:

1. Growth. Consider both revenue and free cash flow. Consider both the short term and long term. Look for consistency. Consider the impact of buybacks on per share growth metrics.

2. Margins. Look for margins that are widening over time, allowing FCF growth to outpace revenue growth. Consider each expense separately (e.g. COGS, R&D, CAPEX).

3. Return on capital. Look for a consistently high number and a low payout ratio. Consider the company’s debt level and interest expense.

4. FCF yield. Consider whether the growth rate justifies the valuation. Be mindful of stock-based compensation.

What would you add?

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